UNITED ARAB EMIRATES: An Introduction to Dispute Resolution: Domestic

The following Overview featured in Global 2023 and is awaiting update from the firm.

An Overview on the UAE Bankruptcy Law  

Introduction 

Previously, the UAE bankruptcy regime was based on the general rules provided for under the Federal Law No. 18/1993 on Commercial Transaction from Article 635 to Article 900. Then a standalone special law regulating bankruptcy was enacted (Federal Decree-Law No. (9) of 2016 On Bankruptcy and amended by virtue of Federal Decree-Law No. (23) of 2019 dated 4/9/2019, Federal Decree-Law No. (21) of 2020 dated 27/9/2020, and, most recently, Federal Decree-Law No. (35) of 2021 dated 20/9/2021)(“Bankruptcy Law”) whereby the legislature laid down the rules on the bankruptcy of merchants and commercial companies, including the liquidation of their assets. Moreover, to protect the state’s economy, and for enhancing the stability of the investment opportunities and investment environment, the legislature laid down provisional rules and procedures applicable prior to the bankruptcy and liquidation stage, whereby the debtor can, through protective and preventive measures, either reach settlements with the creditors protecting the debtor from going into the bankruptcy, under a process called “preventive composition”, or enable the debtor, who is suffering from financial instability, under the supervision of the court to restructure the business through a plan prepared by a court-appointed trustee, after conducting debts verification and assets evaluation, to be voted on by the group of creditors, under a process called “financial reorganisation.”

As the state legislature is keen to build trust in the overall investment environment in UAE, the Bankruptcy Law calls for a special permanent committee to be formed under the name “financial reorganisation committee” to oversee the management of the financial reorganisation procedures of a special group of companies, being the financial institutions licensed by the competent supervisory authorities (such as financial entities, banks, insurance companies). The main mandate of such committee is to facilitate reaching a consensual agreement between the debtor and his creditors, with the help of one expert or more to be appointed by the committee for this purpose.

It is to be understood from such evolution in the overall bankruptcy rules that the legislature’s objective is to prevent any tampering with the UAE’s economy, which is stable and affords opportunities for businesses from all over the world, and to prevent any businesses from using the UAE jurisdiction to evade paying debts and evade their financial liabilities, in addition to helping investors and businesses, prior to or during their financial distress, from losing their business. Hence, the Bankruptcy Law provides for strict provisions, procedures and penalties to protect all stakeholders, including creditors and debtors.

General Overview 

The bankruptcy regime in UAE creates a balance between the protection of the debtor’s rights on one hand, and the group of creditors on the other hand, in addition to the balance it creates between secured and unsecured creditors. One of the examples of such balance is the finality and protection given to most of the bankruptcy court’s decisions and judgments by not being subject to challenges before higher courts, except in very specific and limited instances: the procedures for challenging such decisions and judgments are provided for in the Bankruptcy Law. Furthermore, the legislature has taken into consideration the surprise element and the swiftness of procedures by laying down very strict deadlines in order to complete certain procedures, and to issue particular court decisions and judgments, not to mention the ability of creditors to decide on certain primary procedures impacting their debts, such as voting and approving restructuring plans. By this, it can be said that the bankruptcy regime in UAE limits the detriment to be caused by the debtor to his creditors and often ensures the collection of a significant portion of the debt by the creditors despite their debtor’s financial distress and inability to meet financial obligations.

Preventive Composition 

If a debtor is facing financial issues preventing him from paying the debts by their due dates, and as a result would need the assistance of the court to reach settlements with his creditors - and provided that the debtor is not in a situation of cessation of payment of his due debts for a period exceeding 30 consecutive working days -then the debtor may apply to the court for preventive composition. Approval of such an application would help the debtor to reach for settlements with his creditors, with the help of a court-appointed trustee, by setting out a plan to prevent the debtor from going into bankruptcy and to guarantee payment of debts in a certain specified mechanism approved by the creditors. This plan is placed and executed under the supervision of the court, which gives safety and security to the creditors to get paid based on a well-identified plan.

Bankruptcy and Restructuring the Debt 

If the debtor’s situation is worsened, resulting in financial instability, and in the case of insolvency where the debtor’s assets are less than his liabilities, and in the event the debtor ceased payment of due debts for more than thirty consecutive working days - in this case, and similarly with other bankruptcy regimes in other jurisdictions, the debtor shall be declared as bankrupt and his assets shall be liquidated to avoid growth in his debts and the depreciation of his assets. However, one can understand that the legislature’s objective is to create economic stability and maintain a healthy and stable investment environment; hence the Bankruptcy Law provides for preventive provisional procedures to be followed by the debtor by appointing a trustee to evaluate the financial situation of the debtor and to decide on the feasibility of restructuring the debtor’s business - provided that the debtor communicate expressly to the trustee his willingness to continue with the business - based on a well-established and executable plan resulting in paying the debts listed in the approved creditors’ list (secured and unsecured creditors) by the bankruptcy court ensuring that all creditors are treated equally without any preference of a creditor who was, for example, quicker than another creditor in initiating legal proceedings against the debtor. In this way, the interest of all creditors is protected. Not only this, but also the UAE Bankruptcy Law gives the court-appointed trustee the mandate of giving his opinion to the bankruptcy court on his assessment of the possibility of selling the debtor's business in whole or in part on the basis of “a current and running business/a going concern” to another investor who is willing to keep the business running as part of the economy. The main objective of this mandate is to try to collect the maximum return from the debtor’s assets in the best interest of the creditors, as the sale of the debtor’s business as a going concern would achieve higher return since the business would continue operating, as opposed to liquidation whereby the sale of assets would be based on the market value, and will not include the operation as a going concern, which would certainly achieve less return in the bankruptcy account.

The Economic Situation and the Bankruptcy Law 

The COVID-19 pandemic has hit the entire world, resulting in devastating effects on global economies. The UAE economy did not suffer severe hardship but it was certainly impacted, being connected with the global economies. The UAE government took effective preventive procedures to mitigate the situation. The UAE legislature interfered in the right time in order to spare the businesses and enterprises in UAE from going into bankruptcy due to the COVID-19 situation, amending the Bankruptcy Law by adding a new chapter related to “emergency financial crisis”, whereby the legislature enacted specific rules for the debtor who has become indebted due to an emergency financial crisis. The debtor is entitled to submit an application to open the bankruptcy procedures and benefit from the moratorium rules for a period of 40 working days from the date of the issuance of the bankruptcy procedures' commencement decision by the court to enable the debtor to enter into settlements with his creditors without the appointment of a court trustee, but under the supervision of the court. Such settlements would be binding on all creditors, in the event that an agreement is reached on the settlement of the debtor’s debts by creditors representing two thirds of the debts. Nevertheless, the legislature kept the authority of the court to issue a decision rejecting the settlement if it transpired that the settlement was entered into in bad faith.

Conclusion  

In conclusion, and in light of the above, it is clear and evident when the UAE Bankruptcy Law was enacted in 2016, the UAE legislature took into consideration the public interest, and the desire for economic stability, a healthy investment environment and a stimulating, growing economy: the practical application of the Bankruptcy Law provisions before courts plays an important part of a strong economy. The legislature has made a number of amendments to the Bankruptcy Law in recent years, in the UAE’s quest to continually improve. We expect yet another amendment to the law in the near future to reflect the issues faced by practitioners, courts, experts, creditors and debtors.